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Less than three months have passed since that halcyon day when Gordon Brown, not previously known as a gaffe-prone politician, provoked howls of mirth in the House of Commons after claiming that his government’s prompt response to the credit crunch had “saved the world.” George W. Bush was still in the White House, and the contrast between the British prime minister’s bold plan to partly nationalize failing banks–making billions of pounds of fresh capital and government loan guarantees available in return for preferred shares–and Henry Paulson’s dithering made Brown’s boast, though unintended, almost plausible. (He’d meant to say “saved the banks”–a confusion that tells its own story.) But no one’s laughing now.

On February 4 Brown told Parliament that a combination of fiscal and monetary stimulus was needed “to take the world out of depression.” Though he tried to pass off his use of the D-word as another slip of the tongue, Brown’s inadvertent candor was only the latest sign that this really is the winter of Britain’s discontent:

§ On January 28 the International Monetary Fund predicted the global economic crisis will hit Britain harder than any other developed country, with the economy expected to shrink by 2.8 percent this year. (The projected downturn in the United States is 1.6 percent.)

§ Just as Britons dug out from the heaviest snowfall in decades, a wave of wildcat strikes at power plants and oil refineries over the use of foreign labor threatened the country’s energy supplies. Echoing Brown’s 2007 slogan of “British jobs for British workers,” the protests were a reminder of the dangers to domestic peace posed by a long-term slump.

§ To compound Brown’s worries, the most recent poll by the Guardian showed that nearly two-thirds of British voters thought the government’s efforts to contain the crisis were doomed. Overall, the Tories, flat-lining since the economy turned sour, now lead Labour by 44 percent to 32 percent.

§ On February 10 cabinet minister Ed Balls, Brown’s closest ally, warned that the crisis is “more extreme and serious than that of the 1930s.”

Like the Groundhog Day blizzard that brought Britain to a standstill, not all the country’s economic troubles are the government’s fault. Wall Street bankers were no better at pricing risk than their counterparts in the City of London; the temptation to ride the debt-inflated housing bubble no easier to resist in Dubai, Dublin or Dallas. And just as Bush inherited the laissez-faire ideology of Ronald Reagan, so the tide of deregulation here runs back to Margaret Thatcher. The difference is that Britain’s Faustian bargain with the money markets was sealed by a politician who describes himself as a socialist.

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It was Gordon Brown who put out the welcome mat to flight capital from around the globe; Gordon Brown who, in exchange for a little stealthy redistribution around the edges (more money for schools and hospitals, a minimum wage), promised to keep taxes low and lionized speculators. And it was Gordon Brown who arranged for “Fred the Shred” Goodwin, the slash-and-burn chair of the Royal Bank of Scotland (RBS), to become “Sir Fred.” During his ten years as Tony Blair’s Chancellor of the Exchequer, Brown was only too happy to take the credit as British bankers, encouraged by New Labour’s “light touch” approach to financial regulation, stuffed their pockets with cash, bidding up the price of everything from vintage Bollinger to the gas-guzzling SUVs known here as Chelsea tractors. Speaking to an audience of fund managers in June 2007, Brown was in typically flattering mode, saluting their “remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”

Now that the party is over, the flight capital has fled and Goodwin has resigned in disgrace (the taxpayers have had to stump up £20 billion to keep RBS afloat), it is hardly surprising that an increasingly desperate public blames Brown for its troubles. The Bank of England, which cut interest rates to 1 percent in early February–the lowest level in more than 300 years–may prefer to say that the economy “is in the throes of a severe and synchronized downturn.” But with monetary policy running out of runway, the pound trading at record lows against the yen and the dollar, and unemployment above 6 percent and rising fast, the controversy over what to call the country’s financial crisis has become less interesting, and less frightening, than another far more stark question: is Britain too big to fail?

Crispin Odey, a hedge-fund boss whose prescience about the weakness of British banks brought him a £28 million bonus last year, observed that Britain risks “being exposed as a small country with debt it cannot repay.” Investment guru Jim Rogers, former partner of George Soros, was even more blunt. “Sell any sterling you might have,” Rogers told Bloomberg. “It’s finished. I hate to say it, but I would not put any money in the UK.”

Behind such comments lurks the specter of another bankrupt island nation–the fear, as The Economist recently put it, that a city known in boom times as Manhattan-on-Thames, or Londongrad for all its wealthy Russian exiles, might turn into Reykjavik-on-Thames. In October, when Iceland became the first national casualty of the credit crunch, the notion that Britain might follow its northern neighbor into bankruptcy seemed absurd. Like the City of London, Iceland’s banking sector owed its spectacular growth to transactions in foreign currencies and debt-fueled acquisitions. Yet once the Icelandic króna started to slide, the government could do little to protect it. Unable to pay its foreign debts or buy imports, Iceland was forced to call in the IMF. As BusinessWeek recently pointed out, the $2.8 trillion balance sheet of RBS (currently 68 percent owned by the British taxpayer) alone is larger than Britain’s entire gross domestic product. Exact comparisons are hard to pin down, in part because different sources give different figures for total debt. And even after two decades of malign neglect by Thatcher and Blair, manufacturing and mining still account for about 17 percent of the British economy. The perils of remaining outside the big currency blocs are the same, though, which is why Iceland’s new left-wing prime minister, Johanna Sigurdardottir, said she thought her country’s “best option is…to join the EU and adopt the euro.”

Might Britain follow suit? Opposition to the euro is the cornerstone of Tory foreign policy, and though Labour is theoretically open to joining, even the Liberal Democrats (led by former Nation intern Nick Clegg), still the most pro-European of the three major parties, recently dropped their long-term commitment to join the euro.

But if politics has closed one road out of Britain’s predicament, it might also open others. So far the government has limited itself to what might be termed financial firefighting: recapitalizing failing banks, trying to stimulate lending with government loan guarantees, forcing short sellers (speculators who sell borrowed stock, hoping to make a profit when share prices fall) to disclose their positions. On February 13 the Bank of England will begin a £50 billion asset swap, buying up companies’ short-term debts and offering Treasury bills in exchange. Though criticized by the Tories as ineffectual, none of these measures have been particularly controversial. Even Richard Lambert, the former editor of the Financial Times who now heads the Confederation of British Industry, said that Brown’s latest moves “are almost exactly the measures we at the CBI have been asking for. So we are pleased.”

The problem is that so far the medicine isn’t working. And Brown, who famously promised voters “no more boom and bust,” seems unable to articulate a fresh vision, a narrative of national renewal comparable to President Obama’s call to remake America. Perhaps because that would entail admitting that a return to the day before the disaster, when bankers called the tune and politicians danced attendance, is as undesirable as it is impossible.

Yet inaction has its perils. The government’s reluctance to get too involved in running the banking system risks creating “zombie banks,” says Scott Urban, former senior editor and consultant at Oxford Analytica, a strategic consulting firm. “You can pump in all the money you want, but these banks will still be extremely risk-averse.” The wave of oil refinery strikes, like the French general strike and earlier protests in Greece, suggests that in Britain, too, the surface placidity of everyday life masks considerable discontent. “In Labour’s working-class heartlands,” says Jon Cruddas, MP for Dagenham, “there is a powerful feeling of being dispossessed.”

Cruddas faults the government for doing nothing during the boom years to halt the European Union’s “race to the bottom,” leaving British workers among the least protected in Europe. Though he sits on Labour’s back benches, Cruddas, who comes from a Catholic working-class family and arrived at his politics by way of liberation theology, has become an increasingly influential voice urging the party toward greater economic activism. Perhaps surprisingly, he doesn’t favor wholesale nationalization–“Why should the government have to price the banks’ toxic assets? Let the market do that”–but says they might as well put the banks they’ve been forced to buy to good use. One idea is a National Infrastructure Bank, issuing public works bonds to fund railway improvements, bridges, wireless broadband, etc. (Similar ideas have been proposed in the United States, bolstered by regulator Elizabeth Warren’s revelations about how little Washington got for its TARP billions.)

More radical is Cruddas’s plan for social credit and micro-lending, turning the hundreds of recently shuttered post offices into community development banks–another model, pioneered by the Grameen Bank in Bangladesh, as well as ShoreBank in the United States. (Peter Mandelson, the New Labour godfather serving as business secretary, endorsed a version of the “People’s Bank” plan–an indication of the shift in politics here.)

Cruddas’s really big idea is for a housing bank, using Northern Rock, an S&L taken over by the government a year ago, as a vehicle to enable local councils to build 250,000 units of public housing a year. “Since Thatcher got the government out of the housing business, we’ve got 2 million families on council waiting lists,” he says. “Even in boom times there was no way the private sector was going to house those people.” With so much of the construction industry idle, Cruddas says, housing could be “Labour’s equivalent of the TVA–a program that changes lives and transforms politics.”

With no need to call an election until 2010, Gordon Brown might just have enough time to turn the crisis into an opportunity. First, though, he has to keep his balance–and find his nerve.